Retirement savings changes could come into effect soon. Here’s what it will mean for you

Editor’s Note: this is an update Story first published on December 8, 2022.

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CNN Business

If lawmakers pass a big spending package this week, new retirement rules could soon come into effect that could make it easier for Americans to save their retirement savings and make it less costly to withdraw them.

The retirement savings provisions, known as Safe 2.0, are drawn from a bill passed by the House and bills passed by two Senate committees.

“[SECURE 2.0] “It will help increase savings, provide greater access to workplace retirement plans and provide more workers with a secure income stream in retirement,” said Thasunda Brown Duckett, president and CEO of TIAA, one of the largest US pension service providers. .

Let’s take a look at seven of the provisions in the package known as the omnibus on Capitol Hill, according to a transcript from the Senate Finance Committee.

Most employers starting new workplace retirement savings plans may need to automatically enroll employees in the plan. (Currently it is optional for employers to do so.) In this case, it will be up to the employee to actively opt out if they don’t want to participate.

The Secure 2.0 provision requires employers to set a default contribution rate for the employee of at least 3% but not more than 10%, plus an automatic contribution of 1% per year up to a maximum contribution rate of at least 10% but no more. requires an increase. more than 15%.

The provision will enter into force after 31 December 2024.

It makes it harder for you to save for retirement when you have to pay off student loan debt. Secure 2.0 allows employers to make an eligible contribution to an employee’s retirement plan based on qualifying student loan payments. In this way, it will enable the employee to build up retirement savings no matter what.

The provision will enter into force after 31 December 2023.

It used to be that when you turned 70-1/2, you had to start withdrawing the required minimum amount from your 401(k) or IRA each year. Later, the age increased to 72. Under the Secure 2.0 package, it would increase to 73 from 2023 and to 75 after ten years.

Normally if you touch up your 401(k) before age 59-1/2, you will not only pay taxes on that money, but also pay a 10% early withdrawal penalty.

For employees who are discouraged from saving money on a tax-deferred retirement plan because they fear it would be too complicated and costly to access the plan in an emergency, Secure 2.0 can alleviate that fear: It allows employees to withdraw their money with impunity. up to $1000 per year for emergencies. Although employees will still owe income tax in the year this withdrawal is made, they can recover this tax if they pay back the withdrawal within three years.

If they don’t refund the withdrawal, they will have to wait for the three-year refund period to expire before they are allowed to make another emergency withdrawal.

The provision will enter into force after 31 December 2023.

Currently, if you are 50 years of age or older, you can contribute an additional $6,500 to your 401(k) in addition to the federal limit of $20,500 per year in effect this year.

Under the pension package, instead of $6,500, 60, 61, 62 and 63-year-olds will be allowed to contribute $10,000 or 50% more than their normal compensation amount in 2025, whichever is greater.

The provision will enter into force after 31 December 2024.

However, to help pay for the cost of the retirement package, another provision that will go into effect a year ago will require anyone with compensation over $145,000 to “Rothify” their compensatory contribution. That is, instead of paying pre-tax contributions up to the catch-up limit, you can still pay the same amount of contributions, but you will be taxed in the same year. Your contribution will then be tax-free and can be withdrawn tax-free at retirement. However, the federal government would receive the tax revenue from the initial compensation contribution.

There is an underutilized federal match for low-income retirement contributions of up to $2,000 per year. The new package will enhance and simplify the Savings Credit so that more people can use it. Eligible filers (for example, married couples earning $71,000 or less) may receive an equivalent contribution of up to 50% of their savings from the federal government, but the matching cannot exceed $1,000.

The provision will enter into force after 31 December 2026.

Part-time workers should be allowed to participate in a workplace retirement plan if they currently have three years of service and work at least 500 hours a year. The new package will reduce this service period to two years.

The provision will enter into force after 31 December 2024.

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